Lecture 2
Gross Income
Introduction
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Established the following: Rates for 2014 Credits Taxable income ?
Taxable Income
• Determined in 3 steps (All in terms of ITA) 1 Determine the GI (mainly S8 ) 2. Deduct any exempt income (S14 arw Third Sc) 3. Deduct any allowable deductions (mainly S15) Follow order in calculation (refer example 1 and 2 in previous lecture) N.B. Exemptions should be included in GI first Adjustment for companies where accounting profits are given should be done from that accounting profit.
Example 1
• The accountant for Magaba Pvt Ltd provides you with the following information for the tax year 2014: • Profits for the tax year $86 481 arrived at after taking into account the following: • Trading receipts $95 915 • Allowable deductions $17 234 • Local dividends $7 800. • Required to: Determine the taxable income.
Answer
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Profits per account xxxx Add: Income taxable but not included xx Expenses included but not allowable xx Less Income included but not taxable (xx) Expenses not included but allowable (xx) Taxable Income xxxx Support answer in terms of legislation or case law. NB. If TI is negative it is an “assessed loss” (deductions are greater than gross income/income).
Cont’d
• Profit per accounts Less: local dividends Taxable Income Notes: Allowable deductions S15(2)a Trading receipts S8(1) $86 481 (7 800) $78 681 Determination of Gross income
• Two types: a) General definition of GI (S8(1), S10, S12 b) Specific inclusions – this is income that does not qualify under the general definition but is included because Act specifies amounts be included in GI (S8(1) a – S8(2) and S12
General definition (S8.1)
• “gross income” means the total amount received by or accrued to or in favour of a person or deemed to have • been received by or to have accrued to or in favour of a person in any year of assessment from a source • within or deemed to be within Zimbabwe excluding any amount (not being an amount included in “gross • income” by virtue of any of the following paragraphs of this definition) so received or accrued which is • proved by the taxpayer to be of a capital nature .
Definition highlights
• Gross income is the total amount received or accrued by a person/taxpayer • When a person receives or income accrues, he should be entitled to it or/and it should be for his benefit • Gross income can be judged to be received or accrued to the taxpayer although it is for another person . • Gross income is received or accrues in a tax year • Gross income should be from a source within Zimbabwe • Gross income can be judged to be from a source within Zimbabwe • Gross income is not a capital receipt
Activity
Discuss whether or not the following transactions which took place in the 2014 tax year would constitute gross income in terms of S8 (1) (general definition): a) Trading stock valued at $200 from John’s business is stolen . b) John is paid and receives $300 for trading stock he sold 2013 tax year. c) John receives $400 from a source out of Zimbabwe and a also a source not deemed to be within Zimbabwe.
Cont’d
d) An amount $600 received by John is from a source within Zimbabwe but is of a capital nature. e) An unspecified amount accruing for the benefit of John for the 2013 tax year is from a source deemed to be within Zimbabwe, is not of a capital nature . It cannot be quantified due to some condition that can only be fulfilled in the 2014 tax year. d) John sold trading stock for $700 in the 2014 tax year but is only paid $450 in the tax year.
Total Amount
• Total means the gross receipts or accruals and not a net amount after deducting any expenses or other deductions e.g PAYE • It does not refer to a profit figure (why?) Amount(S2): 1. Money 2. Any property received in kind (tangible or intangible) with an ascertainable money value
Cont’d
3. Receipt of a loan CIR v Genn & Co (Pty) Ltd (1955) 20 SATC – Held that borrowed money is not “received” since at the same moment that the borrower is given possession he falls under the obligation to repay. It is therefore not received for his own behalf. 4. An amount held in trust = not for t/p benefit but for benefit of clients e.g estates agents, lawyers etc. Separate account opened for amounts from the same account holding funds for the day to day running of the business. If amounts deposited into same account as day to day account for running business then tp benefiting = receipts.
Meaning clarified 1. W. Lategan v CIR (1926)2 SATC 16 Concept applied giving the word –amount-­‐ its wider meaning of including any property coporeal or incorporeal received/accrued to tp that had an ascertainable value. 2. CIR v Butcher Bros (Pty)Ltd 13 SATC 21 The Commissioner could not establish the amount representing value of improvements made by the lessee to a leasehold property. Because no amount was established by the Commissioner the court decided there could not be an inclusion in the gross income of the lessor (the owner)
. CIR v Butcher Bros (Pty)Ltd 13 SATC 21
• Facts: The taxpayer owned land that was leased to a cinema company for a period of 50yrs with a further option for another period of 49 yrs. In terms of the contract, the lessee was oblidged to erect a cinema building at his own expense. At the end of the contract the building would become the lessor’s at no cost. • Judgement: • The rights that accrued to the lessor could not be regarded as constituting an amount accrued to the lessor in the year the building was completed, as it did not have an ascertainable money value which Commissioner could include in the year of assessment in which the building was completed. It was decided that an asset that does not have a monetary value or cannot be turned into money cannot be included in income.
Principle from case
• Onus on the CG to come up with a basis to value benefits received in kind (corporeal or incorporeal . When CG sets the system the onus shifts to tp. Examples : • Lease improvements S 8(1) e in the Act (cost of construction is used) • School fees for teachers teaching at a school Taxable at 50% of fees to be paid per child of school fees .Maximum of 3 children per teacher Full fees becomes the amount taxable on child no 4 etc (cost to the employer is used)
Cont’d
• The basis used by the CG where exchanges are carried out is the market value. • An objective test has to be made to determine whether what has been received has a monetary value. It is irrelevant whether or not a taxpayer has received a benefit. (Give example of accommodation of an employee given by the company. • Notional income although it can be quantified does not constitute an amount = remains a possibility but is not a reality e.g interest forgone by not investing.
Commissioner for South African Revenue Services v Brummeria Renaissance 69 SATC 205
• Facts:Developers received interest free loans from future occupants of a retirement village which granted occupants rights to lifelong occupation of the units, Upon termination of the right through death or cancellation, the occupant was refunded the loan.The occupant could not sell the unit, the developer retained ownership of the unit. The developer was therefore receiving the interest free loan in exchange of life rights by the occupants • Judgement:It was held the loan itself was not gross income but the interest free was linked to the ‘right’ acquired by the occupants. This was gross income since a monetary value could be determined. The notional interest was taxable.
Activity 2
1. Shungu runs a business selling shoes. She sells a pair of shoes to Kutambura on credit. Kutambura comes a month later advising Shungu, that some cash he expected had not materialised. He informs Shungu that he has a goat which he tried selling but due to financial hardships being faced by his community, he has failed. Shungu offers to take the goat in exchange of cash owed to him. Discuss the tax treatment of the transaction in Shungu’s hands for the tax year.
Conclusion
• When an amount is received in form that is not
cash market value is used. There are various
methods used to determine the market value:
(list them from examples given in class)
Received(not defined by Act) • To understand meaning tax cases give guidance. i) Amount actually received by a person. ii) An amount that taxpayer may not have in his possession but which he can access to and have control of the income e.g. interest credited to a minor’s account from a donation by taxpayer who retains control) iii) Income received on behalf of taxpayer. Taxpayer entitled to the income e.g. estate agent/ deposited directly into an account.
Cont’d
iv) Legality or illegality of a receipt irrelevant as long as it is from an activity to generate income. Refunding later of illegally obtained income also not absolve taxpayer of paying taxes. • CIR v Delagoa Bay Cigarette Co (1918 ) 32 SATC 47. • The taxpayer advertised a scheme under which it sold packets of cigarrettes at a discount.
Each such packet contained a numbered coupon. The company undertook to set aside 2/3
of the amount received from such sales as a prize fund from which a monthly distribution
would be made to the purchasers of the packets . The directors were to use their discretion
in effecting this. Two distributions were made and before the third distribution the scheme
was stopped as it was considered to be a lottery and therefore illegal. The Commissioner
argued that the prize money had been made from profits after they had been earned and
could therefore not be deducted. The taxpayer argued that the prizes were incurred in the
production of income and that if the scheme was illegal the Commissioner could not tax
the profits. • Held : The prizes were paid in terms of a contract of purchase and sale and therefore the
cost was incurred in earning income. It therefore was not a distribution of profits. The fact
that the scheme was illegal was irrelevant , the income earned was taxable.
Cont’d
• ITC 1545 (1992) 54 SATC 464 • Taxpayer was a dealer in stolen diamonds, knowing them to be stolen. The court stated that it was common cause that the proceeds from the sales of the diamonds amounted to a “receipt or accrual” for the purposes of the definition of “gross income”. The taxpayer was receiving the amount on his own behalf and for his own benefit irrespective of the fact that the person is involved in illegal activities.
Cont’d
v) Overcharging customer constitute gross income = contract exists. ITC 1624(1997)59 SATC 373 An agent was collecting disbursements on behalf of a principal. Defrauded one customer disbursement by overclaiming and recovering an amount in excess of original amount disbursed. Principal reflected receipt in its accounts as income but also claimed a deduction = amount unlawfully taken for restoration Held: No deduction allowed as customer had not discovered of the fraud and therefore not shown intention to institute proceedings of recovery. Principal had also not restored the excess to the defrauded customer. Cont’d
vi) Deposits and advance payments a) amount held as a deposit paid on containers or used packaging merchandise sold and can be returned by customer e.g. sale of drinks in bottles; crates with bottles. Cases: Brookes Lemos Ltd v CIR (1945) 14 SATC 295 (deposits on glass containers supplied to customers)
Cont’d
b) If a deposit cannot be refunded at the instance of taxpayer (is not refundable) = deposit gross inc. Case: ITC 675(1949) SATC 238 Prospective customers had to pay deposits for day old chicks to be delivered in the future. Amount was not refundable on the instance of customer = gross income NB Common factor in both cases = amounts become part of business activity and taxpayer receives amount on his behalf because amount may never be refunded.
Income not constituting a receipt
i)
Income received on behalf of someone else (tp not entitled to income) •Geldenhuys v CIR 14 SATC 419 •Facts: A usufruct trust had been set up . The children owned the sheep while the widow enjoyed the income from the sheep. The children and their mother decided to give up farming. The sheep were sold and the proceeds were deposited into the mother’s account. Commissioner taxed the widow, the widow went to court. •The court held that the sheep sold were less than the sheep that had been inherited. There was no profit to which the mother was entitled to. The amount all belonged to the children.
Cont’d
ii) Stolen money • COT v G (1981 ) 43 SATC. The court said the taxpayer had no right to the takings ; there is no entitlement. The taxpayer had misappropriated funds in his care and therefore did not receive the money on his behalf and for his own benefit. Taxpayr’s intention and the employer’s intention, who passed on the funds was crucial. The person had no intention for the taxpayer to do as he liked.
Cont’d
iii) Amounts held in trust e.g. lawyers = before transfer of immovable property. Amounts not part of business activity carried on by tp. Treatment of receipt in accounting for the transaction important. E.g. a separate bank account to hold trust monies will be separate from bank account for normal activities. Case: C v COT (1984) 46 SATC 57 Tp operating a petrol station required customers obtaining fuel on basis of monthly credit to pay a deposit equivalent to 1/12 of their annual expected fuel purchases from the garage. The amounts deposited were used to purchase fuel by the tp. Recording of transaction: a credit was made in each customer’s name and amount was not offset against any monthly purchases by the customer. The amounts were held to be a form of a loan and not an advance for supplies of fuel.
Accrued
Referring to income that has not been received. S 10(7) =if a person becomes entitled to income in one tax year and receives it in the following tax year the accrual tax period is when he becomes entitled to it and not when it is received.
Meaning of accrued (not defined) • i) Lategan vs Commisssioner fo Inland revenue (1926) 2 SATC 16 The taxpayer. A wine farmer entered into an • Facts: agreement to sell his wine to a co-­‐operative company. A portion of the selling price was paid prior to the end of his year of assessment and the balance was to be paid after the end of the year of assessment. • Judgement: Accrued to means “become entitled to” which means the instalments payable in the next tax year in respect of wine produced during the year of assessment formed part of the gross income for tha tax year. • NB: The important principle established in this case was that accrued meant entitled.
Cont’d
Another meaning : due and payable CIR vs Delfos(1933) 6 SATC 92. Two of the judges in this case interpreted accrued to mean “due and payable”. This interpretation can mean income can be taxed in different years of assessment. An amount can be due in this tax year but only payable the next tax year. The facts of the case: Delfos was entitled to remuneration of 3200 pounds p.a and this was credited to his current account as a director. During 1924-­‐29 the company was going through financial difficulties and less than half was actually paid to him. Unpaid balances were claimed as bad debts and Commissioner allowed. Arrears were all paid in 1930 and Commissioner taxed the whole amount in the year of receipt. Delfos objected. The Appellant Division reversed the decisions of lower courts which said the amount should be taxed in the year that it was due and stated that accrue meant “due and payable”.
When does accrual take place?
Where there is a condition, it is when the condition is fulfilled. In Hersov’s Estate v CIR (1957-­‐21 SATC 106) The courts held that the amount that Hersov had stated in an agreement with his company should be paid two months after his death into his estates was only taxable in the estate’s hands as this is when this amount accrued.The agreement stated that an the company had to prepare a balance sheet within 2mths after his death and 21/2% of the excess assets were to be paid over to his estate.
Does CG have a choice of when to tax?
Silverglen Investments (Pty) Ltd v SIR (1968) 30 SATC 199 The court held that a taxpayer is oblidged to declare income received and accrued and the Commissioner is not at liberty to tax either on an receipt basis or accrual basis. The Commissioner can not postpone disclosed income to another tax year income will be taxed on a receipt or accrual basis whichever comes first. What if taxpayer only declares income on receipt?
Maguire v COT (1966) 28 SATC 146) Income accrued to the taxpayer in an earlier year and was for some reason not included in that year. The Commissioner taxed it the following year. The judge said the taxation of gross income not limited to accruals. Read Student Guide page 6-­‐ 8 for various other aspects you encounter on accrual.
In Favour • On behalf and for the benefit of
Person
• A person • defined in Sect 2. Includes company; a body of persons corporate or unincorporated (not being a partnership); a local or like authority; a deceased or insolvent estate; in relation to income the subject of a trust to which no beneficiary is entitled, the tust; natural person included in the definition. • NB there is no residential qualification of person. If a “person” • A child is a person if they earn taxable income • Spouses are separate persons
Deemed received by/accrued to
The CG invokes/judges a receipt or an accrual to have taken place though conditions say otherwise. Section 10 covers circumstances when the judgements are passed.
Section 10(1)
• . An amount will be deemed to have accrued to a person: 1. Despite it being invested, accumulated or otherwise capitalized by taxpayer 2. If it has not been paid over to taxpayer 3. Having been credited to an account or reinvested or accumulated or capitalized or otherwise dealt with in his name or on his behalf. S 10(2)
• Income from a partnership accrues to the partners on the accounting date.
S 10(3)
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income accruing to a minor child as a result of a donation, settlement or other disposition, to be income accruing to the parent. Important factors: i) A minor qualifies in the definition of “person” and therefore can be a taxpayer if earning income e.g. if employed by someone and receiving a salary/ includes parent if genuine employee/employer relationship S10(3)
ii)Income accruing from reinvestment of income accruing from donation continues being taxable in the hands of the parent. Principle applied CIR v Widan (1954) 19 SATC 341 iii) if minor was to use donation or income from donation to set up business income accruing to the business would not be taxable in the hands of the parent. Link with the donation would have been broken.
Definition of “donation”
Ovenstone v SIR (1980) 42 SATC 55 Facts: A father lent his minor children money to enable them to take up shares privately placed with him, which subsequently produced dividends. He charged market related interest rates on the loans but there was no security required for the loans or no specific terms of loan repayment. Court held that the loan qualified as a ‘donation ,settlement or other disposition’ The judge said ‘other disposition ‘should be read “other similar disposition. The loan contained both elements of gratuitousness and consideration. “Disposition” was interpreted to mean any disposal of property made wholly or to an appreciable extent gratuitously out of the liberality or generosity of the disposer. The dividends were taxed in the hands of the parent.
Sect 10(4)
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• Section 10(4) counteracts tax avoidance schemes. If a
minor child becomes entitled to income in pursuance of
a donation, etc made by a third party, i.e. a person other
than his parent and the parent or near relative of the
minor child has made a donation to the third party or his
near relative, the child‘s income will be taxable in the
hands of the parent.
• Definition of “near relative” S 2
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S10(5)
• deals with a situation whereby a person makes a donation (commonly to a trust) for the purpose of divesting himself of the right to the income from the donated assets but at the same time withholding such income from the beneficiaries until the happening of some event ( can be fixed or contingent) = recipient not yet entitled to it . Events examples: distribution left to the trustee’s discretion; death; marriage or attainment of certain age.Example: Joe can only enjoy the income from the donation when he marries.
S10(6)
deals with income from any deed of donation, settlement or other disposition in which there is conferred upon the settler the right to revoke or to confer the income upon another beneficiary. In such circumstances the income is deemed to be the income of the settler so long as he retains those powers. Example: Donation will be inherited by my son if he is married by the age of 26yrs, if he is not married by age 26yrs the donation will go to my daughter.
In any year of assessment
Tax year 1 Jan -­‐31 Dec = 12mths or period Income can be included or excluded into gross income by looking at the date it accrued. Income that may not be taxable in this period will not escape tax but will be taxed in another period. Source within Zimbabwe
A. Income only taxable if true source or deemed source is within Zimbabwe = source based taxation system. B. Source means not a legal concept but something, which the practical man would regard as the real originating cause of the income. C. . In CIR v Lever Bros. And Unilever Ltd (1946) 14 SATC the judge said the source of receipts, received as income is not so much where it comes from but the originating cause of their being received as income. Originating cause is the work done by taxpayer to earn the income.
Define work
Work done = business carried on, activity taking personal physical or mental effort, employment of capital to earn income or renting it out for use by someone else. Originating cause
As long as the originating cause of the income is Zimbabwe it does not matter a) where the funds are from e.g. a person rendering service in Zimbabwe with funds from outside = ngo employees b) the earnings do not have to be remitted to Zimbabwe e.g. Govt employee paid outside 50
Actual source of various types of receipts
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1. Dividends The country where the company is incorporated which is where the share register is kept 2. Rent from immovable property Where the immovable property is situated because originating cause is the use of the property in that country that is where the capital is employed. 3. Rent on movable property: Principle from COT v British United Shoe Machinery (SA) (Pty) Ltd : length of lease important. In the case of long leases (5 years and above) the source is the place where the lessee uses the asset. In the case of short leases the source would be where the lessor conducts his business Cont’d
•4. Income from services rendered i)
Employment originating cause is the rendering of services . Place of contract conclusion or payment of remuneration does not determine the source. COT v Shein (1958) (FC) 22 SATC 12. NB not apply to occasional employment e.g. someone from another country employed in that country and comes on occasional basis to render service in Zim. Employment specifically in businesses both inside and outside Zim. Income will be apportioned = time basis. Contract of employment crucial. ii) Rendering services when owning the business principle applying on carrying out a business apply. Cont’d
5. Income from business operations Where the business is being conducted. The country in which business operations are carried will be the source of the income = capital employed there. NB operations are not always as clear as that = complications can arise because business is carried on in more than one country or a contract is concluded in a different country.
Cont’d
1. Cases in which courts held source to be in one country. a) Business carried out in Zimbabwe but some business profits from same business realised in another country usually through third party. Overseas Trust Corporation Ltd v CIR(1926) 2 SATC 71 A finance and investment co. carried on business in SA buying and selling shares. A parcel of shares was sold through brokers in Germany. Held: source was in SA because co did not carry out business in Germany or employ any of its capital there.
Cont’d
b) Where the businesses in the different countries are distinct. CIR v Black(1957) 21 SATC 226 Stockbroker carried on business in Joburg where he lived earned profits from shareholding in London. Held: these were two distinct businesses profits earned in London were not from a SA source.
Cont’d
c) Where business activities are carried out in both Zimbabwe and another country (by distinct parties) ITC 1585 (1995) 57 SATC 81 Taxpayer co. processed mineral concentrates in SA on behalf of the owners and earned commission on further work on the materials performed overseas by other parties. It was held the commission was not from a source in SA
Cont’d
2. Source held to be in both countries a) ITC 1103 (1967) 29 SATC 15 The taxpayer manufactured flour and sold some of it through its branches in Zambia. The flour was transferred at cost + railage to the branch. CG taxed 10% of the factory costs. The determination was referred back to CG for reassessment on the grounds that the CG arrived at 10% without requesting tp to submit proposal of what was to be taxed as portion relating on the foreign profit to activities carried on by tp in Zimbabwe. Importance of case: Judge pointed out though that goods manufactured by a taxpayer in one country and then sold by the same taxpayer in another country (business carried out in that country) would have some of the profit accruing from a source in the country of manufacture. The business in Zambia was responsible for part of the overall profit . The CG was entitled to ascertain and determine what part accrued to Zambia and what part associated with activities in Zimbabwe. Cont’d
Conflicting approach used in Transvaal Associated Hide and Skin Merchants v COT Botswana (1967) 29 SATC 97 Criteria used in this case was to determine in which country the dominant activity is carried out and the source will be where the dominant activity will be carried out. Approach to follow not clear but where there is DTA this can clarify how to tax the profits e.g. UK agreement Zim would tax profits attributable to a ‘permanent establishment’ in Zimbabwe of co incorporated in the UK ; if there is no ‘perm est.’ all the profits would be taxable in the UK.
Cont’d
b) Where trade is carried out both in Zim and another country and it is impossible/impractical to determine taxable income in the manner provided for in the Act, the tp should in terms of S19 submit proposal for the determination of the TI. CG has power to determine the taxable income if the proposal is unacceptable or if one is not submitted.
Cont’d
c) A non resident with who carries on business (produces, grows, mines, packs etc) within Zimbabwe and then exports the product for sale in another country. Taxable income = to a proportinate part of any profit derived from the sale or disposal out of Zimbabwe in terms of S19 will be from a source within Zimbabwe.
Cont’d
d) Where a trader purchases goods in Zimbabwe and then sells them in another can pose a problem. The general approach is the source of income is the country of sell . However, take note of Epstein’s case (Agent sourcing asbestos for a partnership carrying business in Argentina) and the Transvaal Associated Hide and Skin Merchants cases (dominant activity test). This means if a taxpayer opens a branch in the other country he is trading in that country and therefore the income will not be from a source within Zimbabwe however, if he does not open a branch he is considered to be trading with the country and therefore the source will be within Zimbabwe. (Read Student Guide pg 11 – 13)
Cont’d
6. Director fees The director provides his service at the head office where his voice is heard = source where head office is. If director is an executive director for co the source is determined by the rules determining source for services rendered. Royalties Source = where the author exercised his wits, labour and intellect. Millin v CIR (1928) 3 SATC 170 wrote bks in SA = published in Engalnd under contract negotiated there. Source was held to be SA. Approach would apply on income on patents rights and similar accruals for inventors. Approach does not apply on royalties for extraction of minerals (situation of mine determines the source or the use of patents rights (specific inclusion).
Cont’d
• 7. Interest Lever Brothers and Unilever Ltd case leading authority. The originating cause of the interest where the credit was provided and not the loan. Facts: Credit was provided outside of SA to a borrower resident in SA. Funds were used and interest was paid from SA. The agreement was entered into outside SA and therefore services where not rendered in SA • 8. Annuities • The place the act or document is created e.g. for a purchased annuity from an insurance co . where contract is concluded. A trust established through a will ,if deceased wrote will in Zimbabwe, the source is Zim. Deemed to be within Zim
• True source will not be Zimbabwe or is doubtful but an invocation by the Act deems the amount to be from a source within Zim (S12). • S12(1)(a) • The proceeds of any contract made in Zimbabwe for the sale of goods are deemed to be from a source in this country by a person carrying out business: Non resident signs contract to sale goods in his home country to another business in another country would be deemed to be a source in Zim.
Sect 12(1)(b)
• Income from services rendered -­‐ Receipts for any services rendered in the carrying on in Zimbabwe of any trade irrespective of where or by whom payment is made, are deemed to be from a source in Zimbabwe. “Trade (S2) = includes any profession, activity or occupation. This section will apply if true source cannot be determined.
Cont’d
ITC 56 (1926) 2 SATC 178 An accountant, practising in SA performed audit work outside the country. Trade carried within SA (would have been different if had a branch office in the other country). ITC 1105 (1967) 29 SATC 116. An insurance assessor carrying business in Zim carried out a loss investigations in Zambia and Malawi. Reports were prepared in the Harare office fees were deemed to have earned while carrying trade in Zim. NB this does not apply to distinct trades. A close link between the services must be established first. Length of absence where a link has been established from Zim is irrelevant (except covered S121(c)
Cont’d
• This section applies mainly to business or professions NB. could apply to employment because definition of trade. See case below: • ITC 1130 (1969) 31 SATC 148 salesman based in Hre travelling to neighbouring countries to effect sales were held to be taxable in Zim on their entire commission because of the close link of earning for services rendered outside and their employment in Zim.
Cont’d
• The section would not apply in circumstances of a managing director of a holding co in Zim when visiting subsidiary co in other countries in his capacity as a chairman or managing director of those co. S 12(1)c
• Income from services rendered by an employee (includes a company director), who is ordinarily resident in Zimbabwe, during a period of temporary absence from Zimbabwe shall be deemed to be from a source within Zimbabwe. ―Temporary absence‖ means an absence for a period not exceeding in the aggregate 183 days in any year of assessment.
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Cont’d
The section also defines “employee” as including a director of a company. What did we say true source of a director’s fees is? What is implication of this section? Activity 1. Mr Lazarus visits Namibia during the tax year. While he is there, he is employed by Home Builders Warehouse, a retailer for building material, as a bookkeeper. He earns an equivalent of $6 000.
Cont’d
You are required to state amount to be included in his gross income if a) The aggregate period that he was in Namibia was 163 days? b) The aggregate period that he was in Namibia was 186days? c) If instead of being employed by Home Builders Warehouse he was contracted as a consultant.
Cont’d
d) he is employed in Zimbabwe and his employer transfers him to work in Namibia i) For an aggregate period of 163 days ii) For an aggregate period of 185 days.
Section 12(1) d
• Income from services rendered to the Zimbabwe Government either within or outside Zimbabwe shall be deemed to be from a Zimbabwean source. However an amount received by or accrued to or in favour of a person by virtue of service rendered outside Zimbabwe shall not be deemed to be from a source within Zimbabwe if the person was not ordinarily resident outside Zimbabwe solely for the purpose of rendering such service.
S12(1)e
Pensions or annuities arising from services rendered by a taxpayer from a source within or deemed to be within Zimbabwe. This amount is taxable whether the taxpayer is still resident in Zimbabwe or non resident. Important to identify the originating cause of pension/annuity. Amounts to exclude from this are: 1. Any pension/annuity for services rendered wholly or partly outside Zimbabwe (services to Zimbabwean government or any other deemed excluded). Where services rendered were partly the amount to be excluded will be determined by apportioning the pension/annuity receipts based on the time served outside Zimbabwe.
Cont’d
2) Section excludes a Pension/ annuity from a non Zimbabwean fund which is being received by someone else i.e. not the person who rendered the service e.g. a widow inherited late husband’s pension resulting from his employment. Why? Sect 12(2)
• Foreign interest and foreign company dividends shall be deemed to be from a source within Zimbabwe if at the time the income accrues the person is ordinarily resident in Zimbabwe. NB.i) Dividends not to be offset against an assessed loss in the tax year. ii) Dividends taxed at 20% Interest 25% iii) Amounts included in gross income to include any tax paid in foreign country.
Sect 12(3)
• An annuity received as a result of an annuity that was purchased outside of Zimbabwe e.g. from an insurance company • It is deemed to be from a source if at the time of purchase the taxpayer was ordinarily resident in Zimbabwe when he first became a member of the fund. Payment can be in cash or otherwise e.g exchange of an asset. • NB Section rules out annuities donated or inherited. The source of that annuity is what is looked at. Activity 1.Jane Doe is a resident of Zimbabwe and is in receipt of an annuity of $3 000. Would this amount constitute gross income in the hands of the recipient in terms of this section (ignore the non taxable portion of the purchase price) if she purchased the annuity 10 years ago from an insurance company outside Zimbabwe while she was working for a company in Brazil. Would the answer be different if she was working for the Govt of Zimbabwe in Brazil ? (Key = residents) !
2. Jane Doe is in receipt of $3 000 annuity which was purchased by her late father , who was at the time of purchase ,a resident of Zimbabwe, from outside Zimbabwe. (Who purchased is key).
Sect 12(4)
• An amount , will be deemed to be from a source within Zimbabwe if paid for the use in Zimbabwe of any film, patent, design, trade mark, secret formulae or any know how. NB applies to either use of a patent or just paying for the know how to use and it is not important where the patent or know how was produced or imparted. Important to note this refers to revenue income and not capital. e.g. a complete surrender of patents is capital as opposed to continual receipt of income for the continual use of a patent e.g Coca Cola secret formula continual leasing for use results in revenue income where as a complete surrender of its formulae will mean Coca Cola will no longer own the formula = result on sale on a capital receipt.
S12(5)
• Recoupments= amounts recovered from an asset sold outside Zimbabwe that was previously granted allowances in terms of S81(i) and ( j) are deemed to be from a source within Zimbabwe.
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